U.S. Pat. No. 7,742,979 to Reding, et al., incorporated herein in its entirety by this reference, discloses a commodity trading system with an automatic hedging function, wherein sellers, such as grain producers and farmers, submit offers to sell commodities for cash, and buyers, such as elevator operators, ethanol plant operators, or cattle raisers, submit basis information that the commodity trading system uses to calculate cash bids for the commodities. The disclosed commodity trading system automatically monitors the seller's cash offers and buyers' basis information for each commodity, as well as the current prices for futures contracts for the commodity, and calculates, on behalf of each buyer, a cash bid price for the sellers' offers. The cash bid prices are calculated by adding the buyers' bases to the current price for a futures contract for the commodity. Notably, since the commodities exchange price can change many times over a given time period, and can fluctuate rapidly from one moment to the next, so can the calculated cash bid prices.
If, at any point in time, a seller's offer price or a buyer's basis falls to a certain number, or the current commodities exchange price for a commodity rises to a certain number, such that the calculations performed by the commodity trading system indicates that the seller's offer price currently matches (i.e., is currently less than or equal to) the buyer's computer-calculated cash bid price, then the commodity trading system disclosed in U.S. Pat. No. 7,742,979 will automatically transmit to the commodities exchange a request to sell a futures contract for the price used by the system to calculate the buyer's bid price. In other words, it will automatically attempt to execute a limit order for a futures contract. If the futures contract (or hedge) is sold for the price that resulted in the calculated match, then the commodity trading system will automatically accept the seller's cash offer on behalf of the buyer, and without the buyer's intervention. However, so long as the limit order for the futures contract has not yet been executed (i.e., the hedge has not been acquired), then the commodity trading system will not accept the seller's cash offer on behalf of a buyer, and no sale will occur between the seller and the buyer. This functionality ensures that, before the seller's cash offer is accepted and the buyer becomes obligated to buy the commodity from the seller, the buyer will have already sold a futures contract (acquired a hedge) on the commodities exchange that corresponds to the size and price of the seller's offer. It also ensures that no cash offer is accepted on behalf of the buyer unless and until a corresponding futures contract is sold for a price that is high enough to preserve the buyer's basis. Therefore, the commodity trading system disclosed in U.S. Pat. No. 7,742,979 essentially prevents cash offers from being automatically accepted on behalf of any buyers until after a limit order for a corresponding futures contract (hedge) has been automatically transmitted and automatically executed by the system.
Although the above-described commodity trading system with automatic hedging provides significant advantages over commodity trading systems without automatic hedging, it has nevertheless been found that such systems do not deal well with odd lots. On some commodity exchanges, futures contracts may only be obtained in a specified minimum lot size, such as 5,000 bushels, or in integer multiples of the minimum lot size, such as $10,000 bushels, $15,000 bushels, 20,000 bushels, and so on. A contract to buy or sell a quantity of the commodity equal to the minimum lot size on the futures market is called a “full lot” contract, while a contract to buy or sell a quantity of the commodity equal to an even multiple of the minimum lot size in the futures market (2×, 3×, 4×, and so on) is typically called a “round lot” contract. Sellers do not always offer to sell their commodities in full or round lot sizes. In fact, more often than not, the quantities and sizes of sellers' offers are determined by the size and capacity of the sellers' farms, production facilities and transportation equipment, and not by any lot size requirements or policies promulgated by a commodity exchange. Thus, sellers frequently extend offers to sell the commodities in odd lot sizes, such as, for example, 1,000 bushels, 3,500 bushels, 8,000 bushels, 19,500 bushels, 31,000 bushels, and so on.
In an effort to deal with odd lot offers, systems like the one described above are sometimes configured to automatically track odd lot offers, without accepting them, and then count and aggregate the bushels associated with the collection of odd lot offers, until a sufficient number of bushels have been counted and accumulated to support a full or round lot futures contract. When the quantity of bushels associated with that collection of odd lot offers equals or exceeds the number of bushels required for a full or round lot futures contract, and the current commodities exchange price has risen to a value high enough so that the calculated bid price matches (i.e., equals or exceeds) the cash offer price, it is then, and only then, that the above-described system will even attempt to sell a full or round lot futures contract to offset the risk associated with accepting, on the buyer's behalf, the accumulated collection of odd lot offers.
Alternatively, instead of delaying acceptance of the odd lot offers, counting and accumulating bushels, and attempting to sell a futures contract only after the number of accumulated odd lot bushels equals or exceeds a full or round lot size, some of the known systems are configured to attempt to sell enough full lot futures contracts to get as close as possible to the number of bushels in the odd lot offer. For example, if the system determines, based on a seller's offer price, a buyer's calculated bid price and a current commodities exchange price, that a futures contract (hedge) should be sold to offset the risk associated with accepting a cash contract offer of 17,000 bushels, but the commodities exchange only buys futures contracts in round lot increments of 5,000 bushels, then some of the known systems may be configured to automatically sell a “short” futures contract for a round lot size of 15,000 bushels. If the attempt to secure the 15,000 bushel futures contract is successful, then the system will automatically accept the seller's 17,000 bushel offer on the buyer's behalf, thereby obligating the buyer to buy 2,000 bushels more than she has sold, which exposes the buyer to the market risk and potential financial impact associated with the unhedged 2,000 bushels. If this happens a mere 100 times during the course of a busy trading day, then the buyer would find herself owning 200,000 more bushels than she has sold, and therefore vulnerable to considerable market risk. As a second alternative, some of the conventional commodity trading systems may instead be configured to automatically “oversell” the futures contract, rather than short it. So every time a 17,000 bushel offer is received, these systems will actually obtain a hedge (i.e., sell a futures contract) for 20,000 bushels, thereby obligating the buyer to sell 3,000 more bushels than she's bought every time this situation occurs. If this situation occurs 100 times in a single trading day, then at the end of the day the buyer will be obligated to sell 300,000 more bushels than she has bought, which probably constitutes an unacceptably high market risk for the buyer.
In addition to the problems described above, there is another very significant problem associated with all the above-described systems, regardless of whether they are configured to hold and aggregate odd lot offers, or immediately sell short or long futures contracts. As previously stated, the above-described systems are, by definition, configured to prevent any offers from being accepted until a “limit order” futures contract is sold. In other words, the futures contract must be sold for a price per bushel that is equivalent to the price required to make the calculated cash bid price for the buyer meet or exceed the seller's offer price. Depending on the activity in the market, that particular price required for the futures contract may not ever be obtainable, which means the “limit order” futures contract may not ever be executed, and the offers waiting for execution of those limit orders will not ever be accepted.
Suppose, for instance, that a buyer on one of the above-described systems receives an odd lot offer to sell 17,000 bushels for a price that requires securing a futures contract price of $4.25 per bushel (i.e., the seller's offer price−the buyer-specified basis=$4.25). Suppose further that the system is configured to attempt to sell a slightly “short” futures contract immediately, rather than delay acceptance of the offer and accumulate the bushels in an odd lot counter merely because it comprises an odd lot. Thus, when the system receives the 17,000 bushel offer, it is configured to attempt to sell a futures contract of 15,000 bushels immediately, which, if the attempt is successful, will leave the buyer holding 2000 more bushels than she has sold. But by the time the system contacts the commodities exchange with the instruction to sell the 15,000 bushel futures contract, and then waits in line for all of the earlier-received $4.25 per bushel futures contracts to be executed, the price per bushel for the futures contracts on the commodities exchange has fallen to $4.24 per bushel. Suppose further that the price of futures contracts for that particular commodity then hovers between $4.22 and $4.24 per bushel for the rest of the trading day, and never again reaches $4.25 per bushel. As a result of the futures contract price hovering all day at a mere 1-3 cents below the price in the instruction to sell the 15,000 bushel futures contract, the 15,000 bushel futures contract is never sold. Consequently, the 17,000 bushel offer is never executed, the seller never makes a sale, and the buyer never buys the grain, even though she really needed the grain and would have accepted the $4.23 futures contract price as well as the risk associated with buying 2000 more bushels than she sold. Nobody is happy because no grain has been sold. Suppose finally, that this situation occurs, or has the potential for occurring 100 or 1000 times during a trading day with 50 different odd lot offers for the same commodity. Even if the sum total of the bushels in the waiting odd lot offers measures in the tens of thousands, none of those offers are accepted and no business is transacted because of the market's failure to hit a certain number. It is for these reasons that the above-described commodity trading systems with automatic hedging are still considered wholly inadequate and even extremely problematic when it comes to handling odd lot offers.
Some conventional systems are configured to avoid the aforementioned problems and issues by tracking all of the odd lot offers received by the buyer and subsequently reporting the information to a human, who must then manually hedge all of the bushels in the odd lot offers before purchasing the bushels in the odd lot offers. The human tries to accomplish this by first aggregating all of the odd lot bushels together, and then attempting to sell an appropriate number of futures contracts at the current market price for the commodity. In this situation, the offer is only accepted and no transaction is completed unless and until the human is successful in tracking, summing and hedging all of the pending odd lot offers for each commodity (there may be hundreds of them), and obtaining offsetting full or round lot futures contracts for the odd lot offers before those odd lot offers are withdrawn or consumed by other buyers. During peak trading times in a volatile and fast-moving marketplace, this manual process of aggregating the negotiating futures contracts for potentially hundreds or thousands of left over odd lots, and potentially hundreds of different commodities is an extremely risky, unreliable, time consuming and error-prone process.
Accordingly, what is needed are commodity trading systems and methods for automatically accepting and processing odd lot offers when a sufficient number of bushels are accumulated to make a full lot, without exposing buyers to the unacceptably high market risk associated with always shorting or overselling the corresponding futures contracts, without putting buyers and sellers in situations where no business is transacted because, although more than enough bushels have been accumulated, no futures contracts are executed because the commodities exchange price has not reached a particular value required for execution of a limit order. What is also needed are systems and methods for processing odd lot offers effectively while confining the market risk associated with executing market orders for futures contracts within an acceptable range, and for intelligently determining, based on the buyer's current trading position for the commodity and the current quantity of the commodity waiting to be hedged, what would be the best time to sell a full lot futures contract, as well as the best number of full lot futures contracts to sell, all without human intervention.